With a third of the surplus in global inventories still to be cleared, the oil market isn’t fully rebalanced yet. But Opec and Russia have reaffirmed that they’ll persevere with their 1.8mn bpd oil-production cuts until the end of this year to clear the glut.
The allies have also signalled they’re ready to co-operate beyond 2018.
Things, for sure, are working in Opec’s favour for now. Compliance with the production curbs members of the Organisation of Petroleum Exporting Countries have imposed on themselves reached a record 129% last month, an impressive feat for a group that has cheated on quotas in the past.
The message to the markets has been strengthened with the help of Russian Energy Minister Alexander Novak. His country is prepared to continue co-operating with Opec even after the cuts expire, Novak said in a Bloomberg television interview in Muscat over the weekend. US crude inventories have dropped for nine straight weeks to the lowest level since February 2015.
As the oil output cuts, coupled with robust global demand, tighten the market, Brent futures have soared to a three-year high near $70 a barrel.
Opec’s obituary has been written many times, as spurts of new technologies and petroleum discoveries rewrite the global energy trade. But the group has, just as often, defied its critics this time too.
For sure, Opec, the producer’s alliance formed in 1960, is not what it used to be when it comes to calling the shots in the oil market. But the grouping that pumps 40% of the world’s oil is still in the lead to manage prices.
By keeping the 1.8mn bpd of cuts in place for a further nine months – and beyond if needed – the oil producers aim to return stockpiles to their five-year average without overheating the market and eliciting a new flood of shale oil.
What’s more, the world’s appetite for oil isn’t going anywhere. Opec’s in-house forecast is that demand for its oil is expected to increase by almost 400,000 bpd in 2018. Longer term, demand is projected to reach 111.1mn bpd by 2040. Opec’s heartland in the Middle East still holds the world’s most profitable fields to pump at about a third of the cost of US shale.
But rising oil prices bring about a catch-22 for Opec.
Just as the production cuts, aided by a growing global economy, have helped push oil prices higher, the International Energy Agency has warned of “explosive” US output growth this year. Opec, too, boosted its 2018 forecast for rival oil-supply growth by 16%, also cautioning of the effects of a higher price environment. The US shale boom has brought the country closer to energy self-sufficiency than at any time since the 1980s.
There are, of course, gainers and losers when it comes to consistently lower oil prices. But the world is in need of a stable oil market with price equilibrium.
Here is the million-dollar question: Can Opec maintain prices high and sustainable without stimulating further growth in US shale oil production?
